Many viewed 2016 as a bounce back year for the oil and gas industry. Last year opened with 51 rigs operating in Ohio, Pennsylvania, and West Virginia (the “Tri-State Region”), and added eight throughout the year to close at 59 operating rigs.

Pennsylvania gained seven rigs and Ohio gained five rigs throughout 2016, while West Virginia lost four operating rigs. The lowest number of rigs operating in 2016 in the Tri-State Region was 35, which occurred in June and August, and the highest total for the year was 59, which was achieved in December.

The winter of 2015-2016 was one of the warmest on record and caused the price of natural gas to dip to nearly $1.50/MMBtu in March of 2016 before bouncing back to close the year over $3.50/MMBtu. In December of 2016, Henry Hub spot prices averaged $3.59/MMBtu as inventories fell below the five-year average. December marked the first time the Henry Hub price averaged more than $3/MMBtu for a month since December 2014.

The prolific amount of dry gas in the Appalachian Basin allowed the industry to push through the downturn that many oil and wet gas producers have suffered. As you can see from the graph below, Marcellus and Utica shale production from the Appalachian Basin accounted for nearly half of the dry shale gas production in the United States for the year.

2016 state-by-state permitting activity

OHIO

According to the Ohio Department of Natural Resources (ODNR), 304 horizontal permits for Utica Shale drilling were issued in 2016. Additionally, Eclipse Resources I, LP and XTO Energy Inc. received the only two permits for Marcellus Shale drilling in Ohio issued in 2016. The following were the top five operators in terms of Utica drilling permits issued in 2016:

PENNSYLVANIA

The Pennsylvania Department of Environmental Protections shows 1,304 horizontal drilling permits were issued in 2016 across the Keystone State. Among the Appalachian Basin counties, Washington (323), Greene (201), and Butler (84) led the way in permitting activity. In the northeast portion of the Marcellus Shale play, Susquehanna (192) and Tioga (106) counties had the most activity. The five operators with the most permits received in Pennsylvania in 2016 were:

EQT Production Company – 227

Range Resources Appalachia LLC – 164

SWN Production – 157

Rice Drilling B LLC – 106

Cabot Oil & Gas Corporation – 77

WEST VIRGINIA

According to the West Virginia Department of Environmental Protection (WVDEP), 199 permits for Horizontal 6A drilling were issued in 2016. The WVDEP monthly summary does not break down the recipients or the counties the permits are issued, but the data shows that August was the most active month with 31 permits issued while July issued the fewest number of permits (eight). The detailed breakdown provided by WVDEP shows only 164 permits were issued in 2016.

Of the 164 permits described in the detailed breakdown, Antero Resources Corporation received 81 permits, EQT Production Company received 40 permits and Northeast Natural Energy LLC and SWN Production Company, LLC each received 14 permits.

2017 projections

According to the U. S. Energy Information Administration (EIA), Henry Hub averaged $2.51/MMBtu in 2016 but is forecasted to increase to an average of $3.55/MMBtu in 2017 and average $3.73/MMBtu in 2018. The EIA expects households heating primarily with natural gas to spend $116 (22 percent) more this winter compared with last winter based on the most recent forecast from the National Oceanic and Atmospheric Administration, which expects 2017 to be much colder than last winter east of the Rocky Mountains, with the Northeast and Midwest 17 percent colder and the South 18 percent colder.

Although pipeline transportation constraints have eased somewhat in recent years, there continues to be a bottleneck in attempting to transport natural gas to Northeast markets. Additional capacity will be available to deliver natural gas from the Marcellus shale region in Pennsylvania to New England with the start-up of the Algonquin Incremental Market (AIM) pipeline. In addition to the AIM pipeline, there are several additional projects expected to come online in the next few years servicing the Appalachian Basin region:

The Rover pipeline could transport 3.25 Bcf/d to Ohio, West Virginia, Michigan, and on into the Dawn Hub in Ontario, Canada. Expected to be in service by mid-2017.

The Leach Xpress seeks to add 1.5 Bcf/d of takeaway capacity to serve customers on the Columbia Gas and Columbia Gulf pipeline systems. Expected to be in service in the second half of 2017.

The Nexus Gas Transmission project will deliver 1.5 Bcf/d of supplies to markets in Ohio, Michigan, the Chicago Hub, and the Dawn Hub in Ontario. Nexus has a targeted completion date of fourth quarter of 2017.

The Mountaineer XPress will transport 2.7 Bcf/d to markets on the Columbia Gas Transmission system, including to customers in western West Virginia, TCO Pool, and other mutually agreeable points. Columbia anticipates initiating construction in the fall of 2017, with a targeted in-service date of October 31, 2018.

The Mountain Valley pipeline would provide at least 2 Bcf/d of firm transmission capacity to markets in the Mid- and South-Atlantic regions of the United States. Mountain Valley anticipates a mid-year 2017 construction start date, with an estimated in-service date during the fourth quarter 2018.

The Atlantic Coast pipeline would have a capacity of 1.5 Bcf/d to run gas from Harrison County, WV, to Greensville County, VA, and then south into eastern North Carolina. Construction is expected to begin in the fall of 2017 with an estimated in-service date in fourth quarter of 2019.

The Atlantic Sunrise expansion project would transport about 1.7 Bcf/d to markets in the Mid-Atlantic and southeastern U.S. The pipeline should be in-service by mid-2018.

The PennEast pipeline will transport 1 Bcf/d from Dallas, Luzerne County, in northeastern Pennsylvania, and terminate at Transco’s pipeline interconnection near Pennington, Mercer County, New Jersey. PennEast expects to begin pipeline construction in 2018 and take approximately seven months to complete it.

As more pipeline projects are completed in the coming years, the price of natural gas should increase and the disparity of spot pricing should narrow.